Figure 1THINGS EVERY CHAPTER 13 DEBTOR SHOULD KNOW
A chapter 13 bankruptcy case is a long process. There is little pleasure to being a debtor or a claim holder in a Chapter 13 bankruptcy case. It requires commitment, patience and determination to successfully complete a plan. Bankruptcy may not be the best long-term best choice for consumer debtors in ordinary financial distress and it is often possible to get control of your finances without a bankruptcy petition. Non-bankruptcy alternatives should be considered before filing a Chapter 13 case. If you are considering filing a Chapter 13 case, you should consider the following facts. Ask your attorney to explain these Chapter 13 realities.
- Chapter 13 is bankruptcy. Even though a debtor pays debt over time, it is still reported as bankruptcy and future creditors will treat it as such.
- Chapter 13 takes a long time. A Chapter 13 plan runs at least three years and in most cases up to five years. It will take patience and dedication to complete your plan.
- Chapter 13 requires discipline. The debtor must continuously work to make sure the Plan is successful. You will have to make all payments, make annual reports to the Trustee, report changes in income. It is work and takes determination to complete a Plan.
- There are alternatives to bankrupty. Bankruptcy may not be your only option, non-bankruptcy solutions and filing under a chapter other than Chapter 13 is possible. Discuss nonbankruptcy solutions to debt with your attorney.
- You be completely honest. Every debtor, under penalty of perjury, is required to fully, honestly and in good faith, disclose, all income, all assets, all debts both before the case is filed and after the case has been approved.
- Multiple court appearances will be required. At a minimum, a debtor is required to appear at two hearings at the court. A meeting of creditors, and a confirmation hearing. A debtor may also be required to attend other hearings on valuation of collateral, relief from the stay, and the like, if those are issues that arise. In many cases they do not.
- The debtor must make payments. Chapter 13 is not free. The debtor pays for everything—attorneys’ fees, trustee’s fees, payments to creditors, interest, and so forth. Payments into the plan will be required. Debtors should be warned that payments will be deducted from their paycheck—while not a garnishment, it may feel like a garnishment, and that discomfort will last the life of the plan. Payments must be made even if not automatically deducted from the debtor’s paycheck. The debtor is responsible for seeing that the trustee receives what is required by the plan even if it means the debtor must carry a portion of each paycheck to the trustee’s office in person.
- Your payments are deducted directly from your paycheck. Chapter 13 cases are funded through payroll deduction orders to debtors’ employers. Your employer will know of your Chapter 13 case. Federal law prohibits your employer from any discrimination against Chapter 13 debtors.
- Family budgeting will be required. A debtor must prepare a budget of family income and expenses and then live within that budget for the life of the Chapter 13 plan. For many debtors, family budgeting is unknown and discomforting. The debtor accustomed to spending $50 a month on hair styling should know before filing a case that life style changes may be required if confirmation and consummation of a plan are to be realized.
- Luxury items may be lost. The debtor may have to choose between confirmation of a Chapter 13 plan and keeping luxury items that fall outside reasonable maintenance and support for the debtor and the debtor’s family. Chapter 13 debtors are not permitted to pay for luxury automobiles or the like through the plan or deduct their cost from income when calculating “disposable income” to be paid into the plan.
- There will be no more credit. In the Eastern District of Michigan, Chapter 13 debtors are prohibited from incurring debt of more than $2,000.00 without court approval.
- The trustee will be watching. The debtor will be subject to the scrutiny of the Chapter 13 trustee for the duration of the case. The trustee can be expected to police the case to monitor the debtor’s performance, to occasionally communicate with the debtor and require information from the debtor, to be a presence in the debtor’s life for years.
- The debtor is protected from creditors. The automatic stay protects the debtor and any codebtors for the duration of the Chapter 13 case. Garnishments stop, repossession are stopped, foreclosures are prohibited, and so forth. Creditors cannot contact the debtor.
- The debtor remains in control but has fiduciary responsibilities. The Chapter 13 debtor remains in possession and control of all property. However, the debtor is required to use and maintain that property with a higher level of care to which the debtor may be accustomed.
- Secured claim holders can be forced to accept reduced payments. The power to change the terms of loans that are secured by collateral is often the principal attraction of a Chapter 13 case. While there are some restrictions, in a Chapter 13 case a secured claim will be fixed at the value of the collateral, and that value will be paid, with interest, over time. The debt that exceeds the value of the collateral is paid with unsecured claims and often receives “pennies on the dollar”. In many cases the loans terms may be changed, including amount of the monthly payment, length of the loan term, and the interest rates can be changed.
- Unsecured claim holders can be paid over the life of the plan.
Unsecured claim holders are entitled to receive at least what they would be paid in a Chapter 7 case, but that amount can be paid over the life of the plan, and the Chapter 13 debtor has great control over the timing and amount of payments to unsecured claim holders. Unsecured claim holders receive only the amount that they would receive upon if you had filed a Chapter 7.
- Codebtors may be protected. If your plan propose to pay a debt, that creditor may not take any collection actions against a codebtor in a Chapter 13 case. This is a great benefit to the debtor with friends, relatives, or coworkers who have co- signed the debtor’s obligations.
- Utility cutoffs. Chapter 13 can help deal with utility service problems. If a utility is threatening cutoff, a Chapter 13 filing buys the debtor 20 days in which to come up with a reasonable deposit or otherwise to satisfy the utility of the likelihood of paying future bills. If utility service is already interrupted, Chapter 13 can provide a framework for reestablishing utility service that does not include immediate payment of the full balance due.
- Negotiating with creditors. The filing of a Chapter 13 case shifts responsibility for dealing with creditors to debtor’s counsel and the trustee. Debtors need to understand that creditors should not be contacting them and that they should not be contacting creditors.
- Loss of job or employment instability. Chapter 13 is based on periodic payments to a trustee. Any interruption in the debtor’s job or loss of regular income upsets the prospects for consummation of a plan. To make your plan work, a debtor may have to accept or continue in a job that is undesirable. The debtor must report any reduction (or increase) in hours or salary to counsel. The failure to report problems or improvements in employment can jeopardize the Chapter 13 case.
- Illness, temporary disability, and pregnancy. Illness, injury or pregnancy can have a traumatic effect on a family’s income and expenses, but they are manageable in a Chapter 13 case. A planned interruption in family income and planned additional expenses can be dealt with if the debtor’s counsel is informed.
- Maintaining insurance. The debtor must insure all collateral that is be paid under the plan. Lapses in insurance during the Chapter 13 case may lead to disruptive and expensive motions for relief from the stay, to convert, or to dismiss. The cost of insurance must be budgeted.
- Divorce and other marital problems. Divorce is a principal cause of financial distress, and marital problems can threaten a Chapter 13 case. The debtor should be encouraged to communicate any serious marital problem with counsel before a domestic disaster leads to the demise of the Chapter 13 case.
- Tax returns and tax refunds. The debtor remains responsible for filing tax returns both before and after they file a bankruptcy case. A debtor must turn over pre filing and post filing tax returns to the Trustee and must report future income tax refunds to the Trustee, and may have to pay all tax refunds received by the debtor during the case to the Trustee.
- Changes of address. It is essential that the debtor inform counsel and the Chapter 13 trustee of any change of address until the case is closed.
- Signing documents. The debtor must sign the petition, Schedules, and Statement of Financial Affairs.
These documents are not usually signed during the first visit to counsel’s office. A debtor will likely have to return to the attorney’s office or sign the documents by mail. A debtor signs the bankruptcy documents under penalties of perjury. Filing false information is a crime.
- Modification. As an debtor’s circumstances change, a debtor may change their plan both before the final confirmation and after the plan is confirmed by the Court.
- Conversion or dismissal.
Chapter 13 is voluntary and may be dismissed at any time or a debtor may convert their case to Chapter 7 at any time.
- Discharge. If the debtor completes payments under a confirmed Chapter 13 plan, the broadest discharge available under the Bankruptcy Code will be realized. The discharge includes claims that would not be dischargeable under other chapters and includes claims that are compromised and claims that are not paid because no proof of claim is filed.
- Postpetition claims. If a debtor has to use credit after the case is filed, if credit is necessary to the success of the debtor’s plan and if permission of the Court is obtained, that debt may be managed through the plan as if it were a claim arising prior to filing.
Source: Keith M. Lundin & William H. Brown, Chapter 13 Bankruptcy, 4th Edition, Appendix A, Sec. Rev. Apr. 14, 2009, www.Ch13online.com.